Soaring gas output from shale fields has helped create an oversupply in the market

Natural gas futures extended gains Wednesday on market optimism that surging U.S. production is beginning to taper off.

Natural gas futures ended 1.6% higher at $2.0360 a million British thermal units on the New York Mercantile Exchange, adding to a 4.8% rise on Tuesday. Prices are down 13% this year, thanks to robust supplies and a tepid winter that chilled demand for gas-fired heating.

Soaring gas output from shale fields has helped create an oversupply in the market, with inventories more than 54% higher than average for this time of year. But data from the U.S. Energy Department released this week indicates production is beginning to taper off in response to low oil and gas prices, with expectations of a 1.1% decline in May over April.

Declining production, coupled with some expectation of a hot summer that would drive gas demand to fuel power plants that produce electricity for air conditioning, are beginning to give the market a lift.

“You are seeing a little bit of a decline in production, and forward expectations are creating a buoyancy in the market,” said Gene McGillian, senior analyst at brokerage Tradition Energy. “The market is turning its attention to forward factors.”

The U.S. Energy Department is scheduled to release weekly supply data Thursday at 10:30 a.m. Analysts surveyed by The Wall Street Journal expect stored stockpiles to be little changed, with a modest decline of 540 million cubic feet for last week, compared with an average increase of 34 billion cubic feet for this time of year.

The rally on the production data is a departure from the usual drivers for the market, which is more often influenced by weather outlooks for the coming weeks as a barometer of expected demand. Weather forecasts turned bearish for the market Wednesday, with an expected prolonged chill turning toward more normal spring temperatures for much of the U.S., but the market looked past the revised outlook.

Demand is expected to retreat further in the coming weeks with warmer temperatures and the onset of so-called shoulder season between winter and spring.

“This market has staged an impressive advance this week despite a seemingly bearish shift within the short-term temperatures outlooks,” research consultancy Ritterbusch and Associates said in a note. “The market appears to be focused on some production slippage that is apparently being interpreted as sustainable.”